Economics

Where the return comes from, what it costs to operate, where the buffer comes from, and how the two tiers are priced against each other.

This page states the structure; the numbers are published per pool, not fixed here.

What the capital funds

The capital is production financing. It is deployed to fund the production cycle of the book; the production earns the revenue; the revenue returns to the pools.

Return is therefore a claim on revenue the capital itself funds into being, not a yield paid on capital held aside. It depends on the performance of the production so funded.

The source of return

Return is the realized revenue of the book, net of the cost of operating it.

For a book of $n$ names, the gross return is the mean of the per-name outcomes,

R_{\text{gross}} \;=\; \frac{1}{n}\sum_{k=1}^{n} r_k,

where $r_k$ is the revenue of the $k$ -th name.

The distribution of $r_k$ is modeled as a power law in rank (see The thesis); the mean is carried by the few names above the rest.

The distributable return is gross return less cost,

R_{\text{net}} \;=\; R_{\text{gross}} - c,

where $c$ is the per-name operating cost: the book's operating cost spread across its $n$ names. Return comes from holding the whole curve, not from selecting a name on it.

Costs

Cost is taken before distribution, not added to it.

The cost of operating the book (sourcing, settlement, and the operation of the monetization itself) is borne off-chain and netted from gross revenue before any position is paid.

What reaches the pools is the net figure. Costs are drawn from gross revenue, not charged against contributed capital; the order in which costs are met does not change how loss is borne (see How loss is borne), under which capital remains at risk.

Cost structure is a published parameter, set by governance per pool; this document states that cost is netted first, not what it is.

The baseline

The Stable Pool carries a baseline, set per pool.

The baseline is modeled from the operated record, not promised from it. It is the floor the structure is built to hold, not a forecast of the surplus above it; if realized revenue and the support sequence fall short, it can be missed.

It is set conservatively, below the modeled mean net return, so the spread between them funds the buffer:

\text{baseline} \;<\; \mathbb{E}[R_{\text{net}}].

The gap is deliberate: a baseline set at the mean would leave nothing to capitalize the Reserve, and nothing to absorb the cycles that land below it.

The Reserve

The Protocol Reserve is the final tier of the Stable Pool's baseline support. It is finite; once exhausted, the baseline can be missed, and capital in any tier can be lost in part or in full.

It is capitalized from the spread between the net return of the book and the senior baseline, retained rather than distributed. It supports the Stable baseline alone: it is not a first-loss buffer, it is not held ahead of the pools, and it absorbs nothing for a Single Pool.

The Reserve grows as the book performs above its baseline; it is drawn only to support the baseline when realized revenue and the partner's support fall short (see How loss is borne).

Reserve adequacy

A buffer protects only to the extent it is sized against what it stands behind.

The Reserve target scales with the concentration it absorbs: the heavier the tail of the book and the larger any single position relative to it, the larger the buffer the structure holds against a cycle landing short.

Adequacy is therefore a function of the book, not a fixed sum: a target set and published by governance, revised as the book changes, and never drawn for anything but loss.

When realized return runs below the baseline, the Reserve is spent down; when it runs above, the Reserve is rebuilt toward its target before surplus is distributed.

The two tiers, priced apart

The Stable and Single Pools hold the same underlying curve at two points on the risk axis:

\text{senior baseline} \;<\; \mathbb{E}[R_{\text{net}}] \;=\; \text{junior expected return}.

The senior tier trades upside for the modeled baseline and the finite buffer behind it, neither of which is assured; the junior tier takes concentrated exposure to a single name for the full distribution of its outcome.

The spread between them is the price of that buffer, itself finite and not assured.

Parameters are published, not fixed here

Baseline levels, cost structure, reserve targets, and pool capacities are parameters, set by governance and published per pool.

This document describes how they relate, not what they are at any moment.